In this time of economic uncertainty, individuals and businesses alike may be considering bankruptcy. This serious decision requires understanding both the benefits and drawbacks of filing a petition for bankruptcy in Arizona. One of the first questions clients ask our experienced Tucson, Mesa, and Phoenix bankruptcy attorney is: “how will declaring bankruptcy affect my credit score?” This is an important consideration that an honest and compassionate bankruptcy lawyer should address before recommending bankruptcy.
What is a Credit Score, and How is a Credit Score Used?
Understanding how bankruptcy may affect your credit score necessitates understanding how credit scores are actually calculated and used. A credit score is a three-digit number (typically between 300 and 850) representing the likelihood you will pay your bills and debts in full and on time. If you’re requesting a loan, i.e., a mortgage, student aid, or financing for a new car, the lender (bank) will run a credit report. This document contains your credit history, which usually includes:
- Open and closed credit/bank accounts
- Current debts
- Length of your credit history
- Bankruptcy & discharge history
- Payment history
- Financial penalties
High debt levels, defaults, late payments, and penalties will result in a lower credit score, while on-time payments and a low debt-to-income ratio will increase your credit score. Reputable lenders often require credit scores around 700 before they’ll offer you a loan. Low credit can result in being denied a credit card or home, car, or student loan, but it can also reflect poorly on professional applications.
The Effect of Filing Bankruptcy on My Credit Score
Pursuant to the Fair Credit Reporting Act, bankruptcies remain on your credit report for 7 to 10 years. However, not everyone’s credit score drastically changes after declaring bankruptcy. If you’ve previously defaulted on loans, accumulated substantial debts, and have a late-payment history, your credit score is likely low. Declaring bankruptcy won’t have a substantial practical impact on an already low credit score. Some petitioners’ credit scores actually increase once their debts are discharged in bankruptcy because debt level is a major consideration in calculating credit scores.
Bankruptcy has the most substantial impact on petitioners with higher credit scores. High credit scores (700 or above) could potentially drop by 200 points after filing for bankruptcy. Mid-to-low level credit scores may drop by 100 to 150 points. This will likely impact your ability to obtain a loan immediately following bankruptcy, but the benefits of bankruptcy often outweigh this temporary roadblock. There are ways to start increasing your credit score and rebuilding your creditworthiness immediately after declaring bankruptcy.
Discuss your Credit Concerns with a Compassionate Tucson Bankruptcy Attorney at the Yusufov Law Firm Today
There is no denying that declaring bankruptcy will temporarily lower most credit scores and affect your ability to obtain financing. An experienced bankruptcy and debt relief lawyer should always consider your current and future living and working conditions before recommending bankruptcy. At Yusufov Law Firm, comprehensive Tucson, Mesa, and Phoenix debt relief attorney German Yusufov contemplates the best course of action for his clients by reviewing their past, present, and future economic needs. Call him today at (520) 745-4429 or contact him online for your free, comprehensive Arizona debt relief and bankruptcy consultation.